Do I Have To Pay Payroll?

That depends on your business tax structure. If you are a sole proprietor or an LLC, you don’t have to pay payroll unless you start hiring people to work for you. In that case, you get an EIN (Employer ID Number) from the IRS and then pay them on the payroll.

On the other hand, if you are an S corporation, you legally have to put yourself on the payroll. You have to pay yourself what you would pay, somebody else if they were doing that job. There are ways that that can be looked at and adjusted, but you have to pay yourself a standard wage. Above that, you can pay yourself a distribution or draw, which is not taxed in the same way.  

As a sole proprietor, any money you pay yourself gets taxed a self-employment income tax, as well as the regular income tax. 

As an S corporation, any money you pay yourself on payroll, gets taxed a payroll tax, as well as the regular income tax. BUT any distributions you take, fall into a lovely category of only getting taxed the regular income tax.

You do have to pay yourself a standard wage on payroll, but the rest of the money you pay yourself can be a distribution which is taxed much less.

Your CPA will be able to help you determine the right amount of payroll to pay yourself. 

Feel free to reply and ask me any questions you might have on this subject!

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Maya Weinreb | Founder & CEO
813-336-1574

Frequently Asked Questions

Do all business owners have to pay themselves through payroll?

No. Whether a business owner must use payroll depends on the business structure and tax election. Sole proprietors and most LLC owners typically take owner’s draws or distributions rather than receiving a traditional paycheck.

Does an LLC owner need to be on payroll?

Generally, no. An LLC taxed as a sole proprietorship or partnership typically does not pay owners through payroll. However, an LLC that elects S Corporation tax treatment must generally put working owners on payroll and pay reasonable compensation.

Do S Corporation owners have to pay themselves a salary?

Yes. S Corporation owners who provide services to the business are generally required to receive reasonable compensation through payroll. The salary should reflect what someone else would reasonably be paid to perform similar work.

What is the difference between an owner’s draw and payroll?

An owner’s draw is money taken from a business by an owner and is common for sole proprietors and many LLC owners. Payroll involves wages, tax withholding, and employment taxes. The correct method depends on the business structure and tax classification.

Are S Corporation distributions taxed differently than payroll wages?

Yes. S Corporation wages are generally subject to payroll taxes, while shareholder distributions are generally not subject to payroll taxes. However, owners must still pay themselves reasonable compensation before taking distributions.

How much salary should an S Corporation owner pay themselves?

The appropriate salary depends on factors such as the owner’s role, industry, experience, responsibilities, business revenue, and other circumstances. A CPA or tax professional can help determine a reasonable compensation amount.